Constable VAT & Charities Newsletter Spring 2023


VAT Guide (VAT Notice 700)
Notice 700 is HMRC’s basic guide to VAT rules and procedures. Section 31 ‘Apportionment of output tax’ has been updated with two basic methods of apportioning output tax. One of them is based on selling prices and the other is based on cost values. This follows Revenue and Customs Brief 2 (2023):  VAT and value shifting consultation update, which is discussed below.

This will be of interest to those charities that are membership organisations and apportion subscription income received from members to reflect the value and VAT liability of the individual benefits afforded to members, where a package or range of benefits are supplied to members, in return for payment of their subscription.

Revenue and Customs Brief 3 (2023): Changes to VAT treatment of local authority leisure services
HMRC has recently released the above brief, explaining the changes in the VAT treatment of leisure services provided by local authorities.

Local authorities have historically been treated as undertaking a business activity if they provide leisure services to members of the public. This treatment was challenged and the matter was considered by the courts. The litigation has now concluded and the courts have found that local authorities’ leisure services are provided under a statutory framework and can be treated as non-business activities for VAT purposes.

Local authorities can now revisit the historic VAT treatment of such supplies and apply the non-business treatment to their supplies of leisure services. They can also submit claims to HMRC. Claims should be sent to: and should include ‘2023 LA VAT non-business’ in the subject line of the email.

Education and Vocational training (VAT Notice 701/30)
The above guidance provides information on how VAT applies to education, research, vocational training, examination services and goods and services connected with these activities when supplied by a charity.

Certain building works for educational establishments can be zero or reduced rated. Paragraph 15.1 has been updated to remove ‘carrying out an approved alteration to a listed building’ as zero rated work.


First Tier Tribunal

1. Construction of a building for relevant charitable purposes

Between June 2017 and June 2019, the Zoological society of Hertfordshire (“ZSH”) a registered charity, engaged the appellant, Paradise Wildlife Park Limited (“PWP”), to construct a lion enclosure, an outside exhibition called the “World of Dinosaurs” and a shop called the “Dino Store” at Paradise Wildlife Park (the “park”). PWP zero-rated this work for VAT purposes on the basis that its supplies were of constructing a building intended for use solely for a relevant charitable purpose (RCP).

HMRC disagreed and raised a VAT assessment of £411,641, the amount of VAT calculated at the standard rate on PWP’s construction services. PWP agreed that the work relating to the Dino Store should be standard rated and the appeal concerned the work to construct the lion enclosure and the World of Dinosaurs Exhibition.

The Tribunal considered two questions. The main question was whether PWP was constructing buildings designed solely for RCP use, which turned largely on whether ZSH is carrying on a business and, if it is, whether these buildings are used to some extent in that business. There secondary issue was whether the “World of Dinosaurs”, which is an outside exhibition, is a building.

The Tribunal dismissed the appeal finding that:

  • ZSH is carrying on a business of operating and charging for admission to the park;
  • The lions’ enclosure and the World of Dinosaurs were intended for use at least in part for the purposes of that business; and
  • The World of Dinosaurs is not a building.

As a result, it was concluded that the services PWP supplied in the construction of the lions’ enclosure and the World of Dinosaurs were not supplies in the course of construction of a building intended for use solely for a relevant charitable purpose within Item 2(a) of Group 5, Schedule 8 VATA 1994 and as such could not be zero-rated.

Constable Comment: This case considers the question of when a charity is carrying on ‘business’ activities for VAT purposes in some detail and may be useful for other charities considering construction work and building projects. HMRC issued a ‘policy paper’ on 1 June last year which is titled ‘VAT – business and non-business activities’. This case was heard on 7 December 2022 and the decision released on 10 February 2023; however, the VAT assessments in question were issued on 1 May 2020 and before HMRC issued its revised guidance.

2. Education or obtaining income?

Fareham college (FC) appealed HMRC’s refusal to repay £69,757 of VAT that FC claimed to have overpaid. FC is a further and higher education college which offers courses including catering, hair and beauty and performing arts. Students work in a training restaurant, hair and beauty salon and performing arts centre, operated by FC. FC accounted for output VAT on all supplies made to the public; however, it now considers that the supplies were exempt under item 4, group 6, Value Added Tax Act 1994, on the basis that they were closely related to exempt supplies of education. This follows from the Brockenhurst College decision of the Court of Justice of the European Union (CJEU).

HMRC argued, and the tribunal agreed, that Item 4 of Group 5 to Schedule 9 VAT Act 1994 is to be construed as excluding from exemption supplies where the basic purpose of the supply is to obtain additional income for the body through transactions which are in direct competition with those of commercial enterprises subject to VAT. Article 134(b) of the Principal VAT Directive provides for this exclusion but is not written into UK law. The tribunal decided that it was reasonable to “imply the words of Article 134(b) into Item 4”. Therefore, it was for the Tribunal to determine whether FC’s supplies are excluded from the exemption on the basis that their basic purpose was to generate additional income in direct competition to other businesses.

The Tribunal concluded that FC’s basic purpose of operating the restaurant was not to obtain additional income. The FTT reached this decision on the basis that it was essential for FC to operate the training restaurant for the students to successfully complete their courses. The restaurant had limited opening hours, charges were low for the quality of the food and set with a view to covering the cost of ingredients. Therefore, it was clear that the basic purpose was not to obtain additional income, but to provide students with realistic work experience.

The FTT then turned to the hair and beauty salons. Unlike the restaurant, the FTT was not satisfied that the beauty salons did not have a basic purpose of obtaining additional income. FC offered no evidence that it was essential for two salons to be operated. The salons operated normal opening hours throughout the year and the only evidence regarding low pricing was that occasionally a 10% discount was available for services provided by hair trainees. In addition, there was no evidence to show how supplies made might differ from those in a commercial salon, the FTT therefore concluded that income from the hair and beauty salon is excluded from exemption, and is subject to VAT.

With regards to the performing arts centre, FC made no submissions therefore the FTT could not be satisfied that it was not the appellant’s basic purpose to obtain additional income from the supplies, or that the supplies were not in direct competition with those of commercial enterprises. As a result, VAT was due on the supplies.

Constable Comment: Ordinarily a supply is assessed in terms of “what service is received” by the customer. Irrespective of the motive of the supplier, customers visiting a student operated restaurant or salon are not themselves receiving education (as HMRC argued unsuccessfully in the Brockenhurst case).

Article 134(b) was not written into UK law, presumably because the need to do so was not envisaged. There is a long-standing principle that  EU law can be used to interpret ambiguities in UK law but HMRC cannot act as if EU law applies simply because it failed to adopt it correctly into domestic legislation. If it is now necessary to pretend the UK law contains an enactment of Article 134(b) that seems to cross a boundary. Logically, one would also need to consider the “basic purpose” of all supplies covered by Article 134(b), not only supplies within one narrow subset. There are in UK law nine different Items within Group 6 to Schedule 9 VAT Act 1994  (Education) and Article 134(b) covers several exemptions, not only education.

An FTT decision is only binding on the parties and it remains to be seen whether this decision will be appealed. However, it has the potential to have unforeseen consequences if the Tribunal is correct that HMRC and taxpayers are supposed to operate as if Article 134(b) (and potentially other unenacted provisions of the principal VAT directive) are “by implication” contained in UK law.

3. Appealing decisions: out of time

The Golden Grove Trust (“the Trust”) is a registered charity. In 2019, HMRC issued the Trust with a significant VAT assessment totalling £92,644 and a decision that VAT incurred on constructing a café and toilets was not recoverable as input tax. The Trust applied for permission to make late appeals against both the assessment and the decision to refuse input tax recovery.

If a party wishes to appeal against a VAT decision made by HMRC then the law requires that a Notice of Appeal reaches the Tribunal within 30 days of the date on which the decision appealed against was issued.

The appellant gave evidence that a paper notice of appeal form had been sent to the Tribunal, it had been lost in the post or lost by the Tribunal, and the Tribunal had been contacted to establish what had happened to that Notice of Appeal. There seems to have been some confusion and misunderstanding of procedures and what had happened. This occurred during the COVID pandemic and lockdown restrictions were in place.

The tribunal found that on the facts:

    • In relation to the VAT assessment, the delay in appealing was over two years and four months; in relation to the decision to refuse input tax recovery the delay in appealing was over one year and three months. These delays were very serious and significant.
    • They occurred because of the failure to make the appeals by the statutory time limits.
    • Although the consequence of refusing permission is that the Trust cannot challenge the VAT Assessment and the decision to refuse input tax recovery at the Tribunal, the circumstances of the case were in favour of refusing permission. This is because there was no good reason for the long delays and allowing cases to proceed when the appeal has been made out of time prejudices both HMRC and other taxpayers.

As a result of this, the tribunal refused permission for the Trust to make late appeals.

Constable Comment: This case highlights the importance of being aware of statutory time limits and remaining up to date in dealing with statutory deadlines such as those at issue in this case. Failure to comply with the relevant statutory deadlines can result in serious consequences for the taxpayer. In this case the Trust was not able to present the technical arguments in its favour and it was unable to present its case and have its position heard by the Tribunal. If Charities are in a VAT dispute with HMRC it is important that all time limits are met and adhered with. As this case demonstrates, It is not always possible to persuade HMRC or the Tribunal that an appeal against an HMRC decision should be heard out of time. 

Upper Tribunal

4. VAT refund on healthcare facilities

This case concerned the appellant, Gloucestershire Hospitals NHS Foundation Trust (the trust), applying for a judicial review of HMRC’s decision that the Trust was not entitled to a VAT refund. Contracted-Out Services Direction (COSD) allows VAT refunds on the operation of healthcare facilities and the provision of any related services. The Trust had an agreement in place with Genmed. Under this agreement, Genmed supplied managed surgical theatre facility services including various different elements.

Genmed also supplied some goods under the agreement such as structural items, furniture, re-usable operating equipment and machinery. HMRC allowed the Trust to recover VAT paid on such goods; however, it refused a VAT refund on ‘consumable’ goods such as single use goods including bandages, sutures and protheses, such as hip and knee joints, which are provided to patients during surgery. HMRC refused the recovery of VAT incurred on consumable goods on the grounds that they fell to be considered a separate supply of goods from the supply of services provided. HMRC also did not consider the supply of those goods to be closely related to the supply of those services.

The trust was granted permission to pursue four grounds for judicial review challenging the lawfulness of HMRC’s decision. The Trust succeeded on ground two. It argued that all of the component parts of a fully managed theatre facility, including consumables, are integral to each other and indispensable to the achievement of the Trust’s aims. Therefore, the Trust argued there was a single supply made by Genmed, and VAT incurred was recoverable under COSD.

The Tribunals reviewed both parties submissions and agreed with the Trust. It stated that on an objective basis and from the point of view of a typical consumer, the supply of the services and consumables are so closely linked that they form a single composite supply, being a fully managed theatre facility, that it would be artificial to split. The Tribunal then stated that the single supply of services falls under COSD, therefore HMRC’s decision to refuse a VAT refund was unlawful. It was concluded that the Trust is entitled to a VAT refund.

Constable Comment: This case considered a refund of VAT under the Contracted-Out Services Direction (COSD). There is no statutory or other rights of appeal to the First Tier Tribunal (FTT) against a decision to refuse a refund under the COSD, therefore the Trust’s only remedy, in the absence of an assessment raised by HMRC, was to challenge the decision by way of a judicial review which was heard by the Upper Tribunal (UT).

Please note that this newsletter is intended to provide a general overview of the subject. No liability is accepted for the opinions it contains or for any errors or omissions. Constable VAT cannot accept responsibility for loss incurred by any person, company or entity as a result of acting, or failing to act, on any material in this blog post. Specialist VAT advice should always be sought in relation to your particular circumstance.